MolyCorp and the rare earths
This is from an article by Alessandro Bruno...
The volatility of rare earth prices and soured expectations over the prices of rare earths (with the possible exception of heavy rare earths HREE) have been some of the most frequent arguments used to downplay the future of Molycorp (NYSE: MCP). The refrain goes something like this: “China can drop the hammer on prices anytime it wants”. China has this privilege and it has used that hammer effectively within and beyond the REE space but the hand wielding the hammer is losing strength. China’s ability to control REE prices, and the reason for so much of its manufacturing competitiveness, owes to weak and ignored environmental standards. In REE mining terms, the West has been happy to allow China to absorb the environmental costs as it supplied REE’s at generally low cost. However, like many an amusement park ride, the era of cheap REE’s from China may be approaching the final chapter.
A Chinese REE white paper recommends the need for a revised environmental framework in REE mining. This could cut production even further than its much vaunted export quotas. The White Paper’s publication coincides with a growing public sentiment whereby the Chinese people are demanding far stricter environmental regulations. Environmental concerns are the more likely culprit accounting for China’s shutdown of the Baotou Steel Rare-Earth plant or the crackdown of illegal mining. This reduces China’s ability to cut prices at will and a company like Molycorp, which must take into account strict regulatory and safety standards, will gradually start to gain an advantage. Molycorp is now in a position to gradually carve its own space in the Chinese magnet market itself thanks to its control of the Magnequench patent, which enables it to use rare earths powder to produce neodymium-iron-boron magnets.
Molycorp can therefore benefit from markets associated with downstream finished products used in hybrid vehicle motors and batteries, wind power generators, rocket guidance systems and several known and as yet unknown applications. A further argument against China’s – formerly – all mighty hammer is that an ability to control prices, as OPEC or the Coffee cartel have taught us, is desirable when it can lead to monopolies. The question now that Lynas Corp is about to come on stream with LAMP in Malaysia and others such as Ucore or Great Western have been given support from the US government to pursue development of their resources is whether or not the US will allow China to re-establish its REE monopoly. Similarly, Japan, the largest single importer of Chinese REE’s, has been busy diversifying its REE sources away from China – especially in view of an intensified territorial dispute over the Senkaku Islands. The US government, even one under Obama, is under pressure to avoid China gobbling up the lion’s share of the REE market, suggesting that existing rare earth mines such as Molycorp will be encouraged to stay open.
The diversification of sourcing trend is paralleled by a need for REE players to diversify into downstream and upstream businesses. As it happens, Molycorp’s acquisition of Neo Materials affords it that privilege. Admittedly, Molycorp’s stock was the object of much speculation in 2010 when China started to announce REE export restrictions. That announcement was aimed at propping REE prices and the production cuts were less genuine, given the proliferation of illegal mining. This time, China is more serious about the cutbacks and the Chinese people are engaged in the process through their increasingly frequent protests over poor environmental standards. The sales numbers presented today may not be great; they may even be bad, but Molycorp is set to continue operations, even as it strives to proceed along its ambitious plans. If the company can abide by those plans, investors will start to see the fruits.